Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning

As many economists say China enters what is now the final phase of one of the biggest real-estate booms in history, it is facing a staggering bill: According to economists at Nomura, $ 5 trillion plus loans that developers had taken at a good time. Holdings Inc.

The debt is almost double that at the end of 2016 and last year exceeded the overall economic output of Japan, the world’s third-largest economy.

With warning signs on the debt of nearly two-fifths of growth companies borrowed from international bond investors, global markets are poised for a potential wave of defaults.

Chinese leaders are getting serious about addressing debt by taking a series of steps to curb excessive borrowing. But doing so without hurting the property market, crippling more developers and derailing the country’s economy is turning into one of the biggest economic challenges for Chinese leaders, and one that resonates globally when mismanaged. could.

Luxury Developer Fantasia Holdings Group Co. It failed to pay $206 million in dollar bonds that matured on October 4. In late September, Evergrande, which has more than $300 billion in liabilities, missed two interest-paying deadlines for the bond.

A wave of sell-offs hit Asian junk-bond markets last week. On Friday, bonds of 24 of 59 Chinese growth companies on the ICE BofA Index of Asian Corporate Dollar Bonds were trading at over 20% yields, indicating a high risk of default.

Some potential home buyers are leaning, forcing companies to cut prices to raise cash, and could potentially accelerate their slide if the trend continues.

According to data from CRIC, a research arm of property services firm e-House (China) Enterprise Holdings, overall sales among China’s 100 largest developers were down 36 per cent in September from a year earlier. Ltd.

It revealed that the 10 largest developers, including China Evergrande, Country Garden Holdings Co. and china wenke Co., saw a decline of 44% in sales compared to a year ago.

Economists say most Chinese developers remain relatively healthy. Beijing has the firepower and tighter control of the financial system needed to prevent the so-called Lehman moment, in which a corporate financial crisis snowballs, he says.

In late September, Businesshala reported that China had asked local governments to be prepared for potentially intensifying problems in Evergrande.

But many economists, investors and analysts agree that even for healthy enterprises, the underlying business model—in which developers use credit to fund steady churn of new construction despite the demographic less favorable for new housing—is likely to change. Chances are. Some developers can’t survive the transition, he says.

Of particular concern is some developers’ practice of relying heavily on “presales”, in which buyers pay upfront for still-unfinished apartments.

The practice, more common in China than in the US, means developers are borrowing interest-free from millions of homes, making it easier to continue expanding but potentially leaving buyers without ready-made apartments for developers to fail. needed.

According to China’s National Bureau of Statistics, pre-sales and similar deals were the region’s biggest funding sources since August this year.

“There is no return to the previous growth model for China’s real-estate market,” said Hous Song, a research fellow at the Paulson Institute, a Chicago think tank focused on US-China relations. China is likely to put a set of limits on corporate lending, known as the “three red lines” imposed last year, which helped trigger the recent crisis on some developers, he added. That China can ease some other restrictions.

While Beijing has avoided explicit public statements on its plans to deal with the most indebted developers, many economists believe leaders have no choice but to keep the pressure on them.

Policymakers are determined to reform a model fueled by debt and speculation as part of President Xi Jinping’s broader efforts to mitigate the hidden risks that could destabilize society, especially at key Communist Party meetings next year. before. Mr. Xi is widely expected to break the precedent and extend his rule to a third term.

Economists say Beijing is concerned that after years of rapid home price gains, some may be unable to climb the housing ladder, potentially fueling social discontent, as economists say. The cost of young couples is starting to drop in large cities, making it difficult for them to start a family. According to JPMorgan Asset Management, the median apartment in Beijing or Shenzhen now accounts for more than 40 times the average family’s annual disposable income.

Officials have said they are concerned about the risk posed by the asset market to the financial system. Reinforcing developers’ business models and limiting debt, however, is almost certain to slow investment and cause at least some slowdown in the property market, one of the biggest drivers of China’s growth.

The real estate and construction industries account for a large portion of China’s economy. Researchers Kenneth S. A 2020 paper by Rogoff and Yuanchen Yang estimated that industries, roughly, account for 29% of China’s economic activity, far more than in many other countries. Slow housing growth could spread to other parts of the economy, affecting consumer spending and employment.

Government figures show that about 1.6 million acres of residential floor space were under construction at the end of last year. This was roughly equivalent to 21,000 towers with the floor area of ​​the Burj Khalifa in Dubai, the tallest building in the world.

Housing construction fell by 13.6% in August below its pre-pandemic level, as restrictions on borrowing were imposed last year, calculations by Oxford Economics show.

Local governments’ income from selling land to developers declined by 17.5% in August from a year earlier. Local governments, which are heavily indebted, rely on the sale of land for most of their revenue.

Another slowdown will also risk exposing banks to more bad loans. According to Moody’s Analytics, outstanding property loans—mainly mortgages, but also loans to developers—accounted for 27% of China’s total of $28.8 trillion in bank loans at the end of June.

As pressure on housing mounts, many research houses and banks have cut China’s growth outlook. Oxford Economics on Wednesday lowered its forecast for China’s third-quarter year-on-year GDP growth from 5% to 3.6%. It lowered its 2022 growth forecast for China from 5.8% to 5.4%.

As recently as the 1990s, most city residents in China lived in monotonous residences provided by state-owned employers. When market reforms began to transform the country and more people moved to cities, China needed a massive supply of high-quality apartments. Private developers stepped in.

Over the years, he added millions of new units to modern, streamlined high-rise buildings. In 2019, new homes made up more than three-quarters of home sales in China, less than 12% in the US, according to data cited by Chinese property broker Kei Holdings Inc. in a listing prospectus last year.

In the process, developers grew to be much bigger than anything seen in the US, the largest US home builder by revenue, DR Horton. Inc.,

Reported assets of $21.8 billion at the end of June. Evergrande had about $369 billion. Its assets included vast land reserves and 345,000 unsold parking spaces.

For most of the boom, developers were filling a need. In recent years, policymakers and economists began to worry that much of the market was driven by speculation.

Chinese households are prohibited from investing abroad, and domestic bank deposits provide low returns. Many people are wary of the country’s booming stock markets. So some have poured money into housing, in some cases buying three or four units without the intention of buying or renting them out.

As developers bought more places to build, land sales boosted the national growth figures. Dozens of entrepreneurs who founded growth companies are featured on the list of Chinese billionaires. Ten of the 16 soccer clubs of the Chinese Super League are wholly or partially owned by the developers.

Real-estate giants borrow not only from banks but also from shadow-banking organizations known as trust companies and individuals who invest their savings in investments called wealth-management products. Overseas, they became a mainstay of international junk-bond markets, offering juicy produce to snag deals.

A builder, Kaisa Group Holdings Ltd. , defaulted on its debt in 2015, was still able to borrow and later expand. Two years later it spent the equivalent of $2.1 billion to buy 25 land parcels, and $7.3 billion for land in 2020. This summer, Cassa sold $200 million of short-term bonds with a yield of 8.65%.

By: Quentin Webb & Stella Yifan Xie 

Source: Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning – WSJ

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3 Biggest Mortgage Refinancing Mistakes People Make

Mortgage rates are historically low, according to the Washington Post, but won’t stay that way forever. If you bought a home within the last five to seven years and you’ve built up equity, you might be thinking about refinancing.

A refinance can lower your payments and save you money on interest, but it’s not always the right move. In fact, these three mistakes could end up costing you in the long run.

3 Biggest Mortgage Refinancing Mistakes

Mistake #1: Skipping out on Closing Costs
When you refinance your mortgage, you’re basically taking out a new loan to replace the original one. That means you’re going to have to pay closing costs to finalize the paperwork. Closing costs can range from 2% to 5% of the loan’s value. On a $200,000 loan, you could pay $4,000-$10,000.

https://youtu.be/lHgLuOwXLOg

No-closing-cost mortgages are available, but there is a catch. To make up for the money they’re losing up front, the lender may charge you a slightly higher interest rate. Over the life of the loan, that can end up making a refinance much more expensive.

Here’s an example to show how the cost breaks down. Let’s say you have a choice between a $200,000 loan at a rate of 4% with closing costs of $6,000 or the same loan amount with no closing costs at a rate of 4.5%. That doesn’t seem like a huge difference but over a 30-year term, the second option could cost you thousands more in interest.

Mistake #2: Lengthening the Loan Term
If one of your refinancing goals is to lower your payments, stretching the loan term can lower your cost each month. However, you could pay substantially more in interest over the life of the loan.

If you take out a $200,000 loan at a rate of 4.5%, your payments could come to just over $1,000. After five years, you’d have paid more than $43,000 in interest and knocked almost $20,000 off the principal. Altogether, the loan would cost you over $164,000 in interest.

If you refinance the remaining $182,000 for another 30 year term at 4%, your payments would drop about $245 a month, but you’d end up paying more interest. And compared to the original loan terms, you’d save less than $2,000.


Mistake #3: Refinancing With Less Than 20% Equity
Refinancing can increase your mortgage costs if you haven’t built up sufficient equity in your home.

Generally, when you have less than 20% equity value the lender will require you to pay private mortgage insurance premiums. This insurance is a protection for the lender against the possibility of default.

For a conventional mortgage, you can expect to pay a PMI premium between 0.3% and 1.5% of the loan amount. The premiums are tacked directly on to your payment. Even if you’re able to lock in a low interest rate, having that extra money added into the payment is going to eat away at any savings.


The Bottom Line

Refinancing isn’t something you want to jump into without running all the numbers. It’s tempting to focus on just the interest rate, but while doing so, you could overlook some of the less obvious costs.

By: smartasset

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Jason Walter

FOUR Reasons NOT To Do a Mortgage Refinance: Don’t Make These Costly Mistakes // With record low mortgage interest rates, there is a surge of homeowners doing a refinance home mortgage. HOWEVER, a refinance of your mortgage isn’t for everyone. In this video, I share refinancing mortgage pros and cons as well as how to refinance your mortgage the right way. I also give a brief real estate market update with a reminder about a new fee for those who are thinking about going through the mortgage refinancing mortgage process.

WeBull Promotion: For a limited time, get 2 FREE Stocks (promotion ends Sept 1st): https://act.webull.com/kol-us/share.h… Videos like these take me hours to make due to all the research about the real estate market 2020 (and Youtube is not my full time job) so I hope you appreciate this housing market 2020 update as well as this real estate 2020 report from a licensed CPA (#103885) and Sacramento real estate agent (DRE #01923240). Comment below: are you thinking about refinancing your mortgage? Or have you already taken advantage of the current real estate market and refinanced already? If you have refi’d already what interest rate did you get? Please comment below! *** Jason Walter (Sacramento Realtor/Sacramento real estate agent and native) DRE #01923240 Realty ONE Group Complete jason@meetjasonwalter.com Follow me on Instagram ➜ @SacramentoRealtor *** FREE Sacramento Area Home Buyer Guide ➜ https://bit.ly/2YjUnTJ *** FREE Sacramento Area Home Seller Guide ➜ https://bit.ly/2x1uqZF ➜➜➜ SUBSCRIBE FOR MORE VIDEOS ➜➜➜ To never miss a video about personal finance & real estate related topics, please subscribe to my channel & then hit the bell notification here ➜ https://bit.ly/31kAR73 More of My YouTube Videos: Why Aren’t Home Prices Dropping? Housing Market 2020 https://youtu.be/_n4P7eUzQlM BEWARE – Why I Cancelled My Mortgage Loan Forbearance Offer https://youtu.be/7ovaZw9m60c Mortgage Loan Forbearance Update (5 MAJOR CONS of Mortgage Loan Forbearance & More): https://youtu.be/eGiOLh-Ly40 Real Estate Market Crash Coming? California Housing Market UPDATE: https://youtu.be/eIquaC0gmFI Housing Market Crash 2020? What EVERYONE Needs to Know: https://youtu.be/rjsOnJF_538 How to Apply for the $10k SBA Disaster Loan – Stimulus Package: https://youtu.be/u_Ww86WmZAw What To Do With YOUR Money RIGHT NOW: Personal Finance: https://youtu.be/f8hhkgWV5Q0 Real Estate and COVID-19: https://youtu.be/VHf0MqOgUjc DEAL REACHED: $2 Trillion Coronavirus Stimulus Package: https://youtu.be/g4pJCaV0E34 ➜ PLAYLIST: Videos about Living in Sacramento https://bit.ly/2TkXZSh ➜ PLAYLIST: My 5 Favorite Areas Near Downtown Sacramento: https://bit.ly/2FNHTbT ➜ PLAYLIST: Fixer Upper videos HERE ➜ https://bit.ly/3aGUTNS Moving to Sacramento? Top 10 Reasons to Move Here: https://youtu.be/LHfCyvnSR1w Where to Live in Sacramento CA: https://youtu.be/Xhcb28wjuic 5 Pros & Cons of Living in Sacramento: https://youtu.be/4xVgRZ4alDY Unexpected Ways to Use Your Real Estate License: https://youtu.be/BHviM61p5Ow Why You Should NOT Buy a House: 5 Reasons: https://youtu.be/aTjcCglFfNI 5 Things EVERYONE Should Do When Buying a House: https://youtu.be/M4Thg6NXC74 Royalty Free Music from Bensound

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